February 11, 2016
Along with over 7,000 delegates, JMJ attended this event held in Abu Dhabi in November last year. This meeting point for the global oil and gas industry was stimulating and highly valuable. The wide range of conference sessions provided many pointers to the future ahead of us.
By 2040 it is widely expected that global population will increase to around 9 billion; world energy consumption will have grown by 35 percent from the 2010 figure; global GDP will rise by 140 percent and there will be an expanding global middle class, especially in the emerging countries.
The previous years of high energy demand, accompanied by a fear that supply would run out, is over. And with the huge increase in shale gas output, the balance across the producers has changed. What is different now, is that as the demand continues to rise, it’s at a slower pace and is accompanied by an abundant supply.
While traditional forms of energy (gas, oil and coal) still dominate, improving capacity from renewables is essential. The outcomes from COP21 are expected to look further at alternative energy supplies, but even with that determination to find alternative energy supplies we still expect that traditional forms will still supply 75% of world’s total energy needs in 2035. Alongside the mix of energy supply, there is also the challenge of how to minimize carbon emissions - a massive task.
The changes identified above are part of a cycle in the industry, where demand and supply change with the economic and political environment. For companies operating in this sector, working through the cycle is the big challenge. The conference concluded it isn't going to be easy to meet the growing energy needs. It was clear that the industry must choose how to react to this short term depression, likely to continue through 2016, and navigate a path through it.
Demand and production are expected to fall this year, though the oil price was expected to remain steady. However we have already seen significant price pressures in the first few weeks of 2016. Oil prices have fallen further to a 12 year low; major oil companies have announced dramatic falls in revenues and profits, with some even posting significant losses; and operational changes have been announced, including further cuts in jobs both upstream and downstream.
But rather than a possible sense of gloom, there is still a notable hope for recovery in the oil price in 2016/17a likely growth in all areas in 2017/18. The urgent need is to establish market stability in production and price, stopping the big swings to allow a platform for investment.
And, despite these latest announcements, the conference delivered a powerful message that a much stronger sense of responsibility for our global future sustainability is developing across all parts of the sector. There is a willingness to explore options and more companies are ready to play their part.
A few key themes emerged that align with how JMJ sees the industry - cost management and improved efficiency; a focus on new technologies, and the fundamentals. Let’s take them one by one.
Cost Management and Improved Efficiency
With oil and gas year-on-year investment down 30% in the short term, many speakers identified the need to strengthen cost management and keep a hyper focus on operational efficiency. In a way the industry has created this crisis itself. Decisions were being made that have not proved beneficial to the industry long term.
We must be relentless in pursuing solutions outside accepted practice, and think and behave differently, so we can find solutions beyond traditional learning, possibly from other industries.
NOC’s don't have a good track record in cost management, but along with the oil majors, they demonstrated a positive shift in their willingness to participate in finding and delivering new ideas. There was a strong call for collaboration across the sector between all stakeholders. As one speaker said, ‘travel fast - go alone, travel far - go together’.
Discipline in the use of capital is key, and with spend across the sector down, there are consequences when considering where and how to invest.
Many speakers at the conference highlighted the need for new technologies. The view was presented that, in this period of austerity, the industry needs to find innovative technology solutions. The ‘easy’ oil, for example, has long since been found. New techniques are already increasing efficiency and reducing the cost of economic recovery, and they are also reducing emissions. There is a strong push towards renewables which have become more viable in today’s environment.
More effective R&D, and investment in new technologies across the industry, could make a major difference to the industry and to its sustainability. But this focus has led us to consider how these new technologies could have an impact on safety considerations across the industry? We’re giving that some thought and we will be publishing further comments in the coming months.
These still apply.
For example disciplined project management is even more fundamental.
Safety was highlighted as a major value that cannot be compromised within organizations. It protects our assets and our people, demonstrates superior operations and means good leadership. But the challenge everyone is facing is how to prioritize safety when reducing costs - revisiting safety processes and listening better to what our people say. We need to develop an obsessive pursuit of quality and safety with the ambition to achieve no significant incidents.
And finally, there is a recognized risk, that with so many people leaving the industry, we need to capture and transfer their knowledge, so it’s not lost forever.
So what is the prognosis for our industry longer term? There was an overall feeling, at the conference, that it will emerge stronger from this period - a feeling echoed by recent statements from the oil majors. The sector has the potential to take advantage of this short term depression to embed long term changes, that will serve the industry better in the future. We believe the long term potential is still strong.
One comment seemed to ring true.
Question: When is it easier to make changes - when in good shape or not?
Answer: When not in good shape.
We have the opportunity - let’s take advantage and manage the short term without compromising the future.